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Earnings Call Analysis
Q2-2024 Analysis
West Pharmaceutical Services Inc
In the second quarter of 2024, the company experienced a mid-single-digit decline in organic sales, with net sales recorded at $702.1 million—an organic decline of 5.9%. This decline is mainly attributed to accelerated customer destocking, particularly among the high-value product lines, which saw a double-digit decline. Sales volume dipped largely due to inventory management decisions by customers. However, the Contract Manufacturing segment posted mid-single-digit growth driven by increased sales of injection-related device components.
The overall gross profit margin for Q2 2024 was 32.8%, down from 38.7% in Q2 2023. This decline was more pronounced in the Proprietary Products segment, where the gross profit margin dropped to 37%, a significant 690 basis-point decline from the previous year. This reduction can be attributed to lower production volumes and an unfavorable mix of products, partially offset by increased sales prices. The Contract Manufacturing segment, however, saw an improvement with a gross profit margin of 16.2%, up by 80 basis points from the last year.
The company has revised its full-year 2024 net sales guidance to a range of $2.87 billion to $2.9 billion, down from the previous range of $3 billion to $3.25 billion. The adjusted diluted EPS guidance is also lowered to a range of $6.35 to $6.65, compared to the previous $7.63 to $7.88. This revision reflects a more gradual recovery expectation in customer demand. Additionally, the company expects organic sales to decline by approximately 1% to 2%, contrary to the prior guidance of a 2% to 3% growth.
The company reported year-to-date capital expenditures of $190.8 million, which is $33.3 million higher than the same period last year. The increase is due to significant investments in expanding capacity for both high-value products and contract manufacturing. The company’s cash balance saw a substantial decrease to $446.2 million, down $407.7 million from December 2023, primarily due to share repurchases and capital expenditures. For the full year 2024, CapEx guidance is updated to $375 million, up from the previous $350 million, driven by growth initiatives.
Despite Q2's disappointing performance, there are positive signs from customers indicating a potential turning point in the destocking trend. The company expects a stronger second half of 2024, particularly in the fourth quarter, where they anticipate a return to year-over-year organic growth. They continue to see strong demand in the biologics segment and have repurposed investments made during the COVID pandemic to support new growth opportunities. Plans are underway to expand both manufacturing capacity and global standardization for high-value products.
The company remains a market leader in the containment and delivery of injectable medicines, holding a strong position in the biologics segment. Their long-term growth strategy is buttressed by ongoing capital expansion projects focused on high-value products and increasing manufacturing capacity. Recently, they received accolades for their sustainability efforts, including being named one of America’s most responsible companies by Newsweek. This recognition underscores their commitment to sustainability and corporate responsibility, aligning with their broader business goals.
Good morning, and welcome to West's Second Quarter 2024 Conference Call. Our way of introduction, this is John Sweeney, the new Head of Investor Relations at West. I'm delighted to be here, and I look forward to working with all of you.
We issued our financial results earlier this morning, and the release has been posted in the Investors section on the company's website located at westpharma.com. On the call today, we'll review our financial results provide an update on our business and present an updated financial outlook for the full year 2024. There is a slide presentation that accompanies today's call, and a copy of the presentation is available on the Investors section of our website.
On Slide 4 is our safe harbor statement. Statements made by management on this call and the accompanying presentation contain forward-looking statements within the meaning of the U.S. federal securities laws. These statements are based on our beliefs and assumptions, current expectations, estimates and forecasts. The company's future results are influenced by many factors beyond the control of the company. Actual results could differ materially from past results as well as those expressed or implied in any forward-looking statements made here. Please refer to today's press release as well as any other disclosures made by the company regarding the risks is subject including our 10-K, 10-Q and 8-K reports.
During today's call, management will make reference to our non-GAAP financial measures, including organic sales growth, adjusted operating profit, adjusted operating profit margin and adjusted diluted EPS. Reconciliations and limitations of the non-GAAP financial measures to the comparable financial results prepared and conformity to GAAP are provided in this morning's earnings release.
I'll now turn the call over to our CEO, Eric Green.
Thank you, John, and welcome to West. And I would like to thank Quintin Live for his partnership over the past 8 years and for his many contributions at West. [indiscernible] We will start on Slide 5, where I will cover 3 main topics: first, examine the drivers of Q2 performance; second, discuss a revised outlook for the remainder of 2024 and third, provide insight on our long-term financial outlook and why we remain confident in our growth strategy.
Let's begin with Q2 performance. We had a lower-than-expected second quarter impacted by continued customer destocking. That being said, we are seeing promising signs from our customers that give us confidence of a turning point in this trend. Looking ahead, we expect the second half of the year to be stronger than the first half with a return to year-over-year organic growth in the fourth quarter, led by our Proprietary Products segment specifically Biologics.
We have adjusted our full year 2024 guidance to reflect a more gradual recovery as compared to our previous expectations. While I'm disappointed that we are lowering our guidance, I want to reiterate my confidence in what's proven market-led strategy and attractive long-term growth potential.
Turning to Slide 6. We are the market leader in containment and delivery of injectable medicines, which is 1 of the fastest-growing areas of health care. We have an even stronger position in Biologics, which is the fastest-growing segment with injectables. Our products are addressing the most critical therapeutic areas, including immunology, oncology, rare diseases and obesity. And for the past 5 years, West has achieved a CAGR of double-digit organic revenue growth, demonstrating that we have been able to deliver our long-term financial construct of 7% to 9%.
Moving to Slide 7. Our confidence in our medium- to long-term trajectory is underscored by our ongoing capital expansion projects. The investments we have made to address COVID are now being repurposed to drive increased capacity to address new opportunities. In addition, we have expansion plans focused on HVP products that provide a combination of increased manufacturing capacity and higher level of global standardization through our network.
In Biologics, GLP-1s and changing global regulatory requirements, we are seeing increased customer interest for higher quality, lower particulate and more standardized solutions. This favorably positions West Innovations and leading products such as Westar Select and NovaPure. Another focus for our capital allocation is our HBP devices, which includes our self-injection devices. Our platforms are an integral part of our customers' drug device combination products that are making a difference to patients. These expansion projects remain on target for the back half of the year and 2025.
And lastly, before contract manufacturing we have an exciting growth contribution from our new capacity at our Grand Rapids site. A few weeks ago, I had the opportunity to join our team as we open this new portion of the state-of-the-art facility in support of our customers' injection device platform and producing product in Q4. We and we have the ongoing expansion in Dublin, which is already dedicated to contracted demand for components associated with drugs for diabetes and obesity. We expect it to be completed by the end of Q3.
Our promising growth drivers have us positioned to drive significant value for our customers, the patients and shareholders as we move forward.
Shifting to Slide 8. At the end of June, we published our 2023 sustainability report on the company website. Proudly, we received several accolades, including being named as one of the America's most responsible companies by Newsweek.
Now I'll turn the call over to Bernard. Bernard?
Thank you, Eric, and good morning. Let's review the numbers in more detail. We'll first look at Q2 2024 revenues and profits, where we saw a mid-single-digit decline in organic sales as well as declines in operating profit and diluted EPS compared to the second quarter of 2023 given the current market dynamics. I will take you through the drivers impacting sales and margin in the quarter as well as some balance sheet takeaways. And finally, we will provide an update to our 2024 guidance.
First up, Q2. Our financial results are summarized on Slide 9 and the reconciliation of non-U.S. GAAP measures are described in Slides 17 to 22. We recorded net sales of $702.1 million representing an organic sales decline of 5.9%. Looking at Slide 10. Proprietary Products organic net sales decreased 8.4% in the quarter as customers destocking continued at a higher rate than anticipated. High-value products, which made up approximately 71% of proprietary product sales in the quarter declined by double digits, primarily due to decreased sales of our Westar, Daikyo Crystal Zenith and FluroTec products. Looking at the performance of the market units, the Biologics market experienced a mid-single-digit decline, primarily driven by lower volumes of Daikyo Crystal Zenith and Westar products. The pharma market unit saw a low single-digit decline, primarily due to a reduction in sales of admin systems and Westar products. While the generics market unit declined double digits, primarily due to lower volumes of our FluroTec and Westar products.
Despite these revenue declines in the quarter, we do expect revenues in the second half of 2024 to be greater than the first half. Our Contract Manufacturing segment experienced mid-single-digit net sales growth in the second quarter, led by growth in sales of components associated with injection-related devices. Our adjusted operating profit margin of 18% was a 650 basis point decrease from the same period last year. Finally, adjusted diluted EPS declined 28% for Q2. Excluding stock-based compensation tax benefit, EPS decreased by 28.4%.
Now let's review the drivers in both our revenue and profit performance. On Slide 11, we show the contributions to organic sales decline in the quarter. Sales price increases contributed $21 million or 2.8 percentage points of growth in the quarter. More than offsetting price was a negative volume and impact mix of $65.5 million primarily due to lower sales volume caused by customer inventory management decisions in the period and a foreign currency headwind of approximately $6.1 million.
Looking at margin performance. Slide 12 shows our consolidated gross profit margin of 32.8% for Q2 2024, down from 38.7% in Q2 2023. Proprietary Products second quarter gross profit margin of 37% was 690 basis points lower than the margin achieved in the second quarter of 2023. The key drivers for the decline in the Proprietary Products gross profit margin were lower production volume due to the reduced customer demand in the period and an unfavorable mix of products sold partially offset by increased sales prices.
Contract Manufacturing second quarter gross profit margin of 16.2% was 80 basis points greater than the margin achieved in the second quarter of 2023 primarily due to increased sales prices. Now let's look at our balance sheet and review how we've done in terms of generating cash for the business. On Slide 13, [indiscernible] metrics. Operating cash flow was $283.2 million for the 6 months ended June 2024, a decrease of $24.1 million compared to the same period last year or 7.8% decrease, primarily due to a decline in operating results offset by favorable working capital management. Our second quarter 2024 year-to-date capital spending was $190.8 million, $33.3 million higher than the same period last year. We continue to leverage our CapEx to increase both our high-value product and/or contract manufacturing capacity. Working capital of approximately $849.3 million at June 30, 2024 decreased by $415.3 million from December 31, 2023, primarily due to a reduction in our cash balance.
Our cash balance at June 30, 2024 of $446.2 million was $407.7 million lower than our December 2023 balance. The decrease in cash is primarily due to $454.1 million of share repurchases and our capital expenditures offset by cash from operations.
Turning to guidance. Slide 14 provides a high-level summary. We are updating our full year 2024 net sales guidance to a range of $2.87 billion to $2.9 billion from a prior range of $3 billion to $3.25 billion. There is an estimated full year 2024 headwind of approximately $5 million based on current foreign exchange rates. We expect organic sales to decline approximately 1% to 2% and compared to our prior guidance of 2% to 3% growth. We are updating our full year 2024 adjusted diluted EPS guidance to be in a range of $6.35 to $6.65 compared to a prior range of $7.63 to $7.88. Also, our CapEx guidance is expected to be $375 million for the year, which is an increase from the previous guidance of $350 million. The increase in CapEx is driven by additional investments in growth initiatives and the timing of spend on 1 of our major projects.
There are some key elements I want to bring your attention to as you review our guidance. Full year 2024 adjusted diluted EPS guidance range includes an estimated FX headwind of approximately $0.03 and based on current foreign currency exchange rates, which is a decrease from the prior guidance of $0.04. The updated guidance also includes EPS of $0.22 satiated with first half 2024 tax benefits from stock-based compensation. Our guidance excludes future tax benefits from stock-based compensation.
I would now like to turn the call back over to Eric.
Thank you, Bernard. To summarize on Slide 15, we are the market leader in injectables with an even stronger position in biologics. We are seeing promising signs from our customers that destocking is at a turning point. We are investing significant capital in higher growth areas with expanded margins and cash flow, and I'm confident that we'll achieve our long-term financial construct with our proven market-led strategy and future growth drivers with great pride we will continue to live by our purpose and make a positive impact on patient lives.
Shannon, we're ready to take questions. Thank you.
[Operator Instructions] Our first question comes from the line of Paul Knight with KeyBanc Capital Markets.
Two questions. Number one, in this destocking environment, is it things related to COVID? Or is it broader than that, like injectable drugs, et cetera, if you could kind of give color on that. And then lastly, these new expansions, specifically cited in Kinston and Grand Rapids, do they contribute to revenue here in the 2024 and therefore, your improved 2H.
Yes. Thank you, Paul. The destocking activity that we are seeing is actually a combination of both. Obviously, we're still seeing a little bit of destocking in the COVID vaccines. But also during the pandemic, there was several of our customers when we are having discussions with them. We're increasing their safety stock levels significantly to -- from several months to -- because our lead times got a little bit longer.
Now that we've installed the capacity where our service levels are at the all-time high for our customers, and we're able to respond quickly. They are now taking down those safety stock levels. So it is a combination of both, but it's also allowing our customers to normalize their safety stock for our products in the market. Our belief and speaking with our customers and patient demand on the molecules still remains in line as what we expected. The market shift is not occurring. It's consistent as we've been speaking for the last several years.
And our win rate in new molecule approvals continue to be as good, if not, in some cases, better than what we had in the past. So I feel really good where we are moving forward. In regards to our investments, 2 particular areas in contract manufacturing will be online in second half of this year that's in Grand Rapids, Michigan and also in Dublin, Ireland.
And then in the -- in regards to Proprietary, yes, we have additional benefits coming from Kinston and other expansions in our HVP plans towards the end of this year.
Our next question comes from the line of Larry Solow with CJS Securities.
Welcome John to the company. I guess, Eric, just a couple of questions. It sounds like the demand environment or mid- to long-term environment hasn't changed at all. I'm just curious on the destocking and inventory levels, how is your visibility with that. Are levels like back to where they were pre-COVID or maybe even lower. What gives you kind of confidence that customers aren't -- maybe this goes even a little bit longer than thought. We keep kind of moving that to the right a little bit. You sound pretty confident that you have a good hold on what kind of gives you that confidence?
Yes, Larry, that's 2x there. One is in the beginning of the year, after having discussions with our customers, we had an indication that the return would be a little bit sooner than we anticipated. What I mean by that is a little more pronounced back to normalized demand curves in the second half of this year.
As we progress through Q2, we started seeing the intra-quarter demand slightly less than we anticipated, and we see that persisting a little bit into Q3. So we do see sequential improvements over the next couple of quarters. And as I mentioned, we're turning back to growth in Q4. And that is really our customers are gradually going back to where they were pre-COVID. So we don't see any variations below or any variations slightly above it. So it's pretty much consistent when a customer tells us what they're targeting, i.e., 12 months or 9 months or 16 months. I will tell you though, every customer that we're speaking to has a different algorithm that they manage to. So it's not universal from 1 customer to the next. And as we go through the different segments, whether it's generics, biologics or small molecule pharma they're also in different stages of this -- of the destocking.
Okay. And then in terms of the CapEx, obviously, that's a little bit of an increase, I guess, to me, it certainly signals your confidence, although you mentioned a little bit of timing there. But as we look out over the next few years, do you expect to still kind of spend this $350 million to $400 million investment. Is that something that you still have runway to continue?
Let me start and then turn it over to Bernard because that's important. It's a good question, Larry. Our investments more recently have been -- I mean, obviously, during the COVID pandemic, it was focused on HVP, particularly around stoppers and new finishing of those HVP products to be able to support the vaccine growth. We're able to pivot that as those assets as we speak right now to continue to produce other HVP products for our customers.
These additional investments we've been layering in really is to really support, I would say, 3 specific areas. The continuation of the biologics growth and our participation in that area is extremely high. So we want to head of the curve. So these investments we've been making is really more on the finishing process when you go into Kinston, Jersey Shore, Waterford. That's what you'll see.
Secondly is we are a significant player in the GLP and from 2 angles, 1 on the proprietary elastomer site, which we've always had a very strong foothold and we continue to do so on all commercial drugs. And frankly, there are several that are in the pipeline that are being in development by several customers that we're participating in that arena also, but also in contract manufacturing, we are producing and will produce even more auto-injectors and pens in some cases, doing some of the billing at the end of the process for our customers. So it's -- that's the second area is around the GLP-1s.
And the third area, which really kind of ties to the biologics also, is that a more -- there's more demand in the future talking to our customers about some of these regulatory changes that we're working through with them on moving bulk standard material more up the HVP curve. So those are the 3 areas that we really focused our capital. Now the long-term amount of order to touch on that because that's a good question. How long will this persist?
Yes, Larry, just 2 things on that. One, on the increase in CapEx for this year, really, the major driver behind that is a business that we've been awarded from customers for our Dublin facility, where they actually want us to put the capacity in place sooner than originally anticipated. So we pulled some of that CapEx that we had earmarked for '25 into '24 to meet those requirements.
When we look at the longer-term we're really targeting about 6% to 8% of revenues. So getting back to pre-COVID levels of CapEx for our business. But that -- again, if -- and that's based on the demand that we're seeing today and how we're going to meet it. If that demand increases or goes beyond that and particularly around finishing capacity, the areas where we see that could potentially happen, then we would deploy more capital, but it will be very growth-focused if that was the case and always around -- or predominantly around HVP.
Got it. And the 6% to 8%, Bernard, CapEx of revenue, does that kind of support your sort of 7% to 9% targeted growth outlook, not this -- maybe -- I don't know if it begins next year, but certainly multiyear sort of design. Has that changed at all that 7% to 9% I should rephrase.
No. The 6% to 8% would support that level of growth -- and as we say, if we go beyond that, and then it depends on what areas and where the growth comes from, we always have the ability to go and adjust that. But again, the CapEx remains very growth focused. And I think we're getting to like 60% to 70% of our CapEx budget is really growth focused at this point and predominantly around HVP and then some as Eric said in contract manufacturing, but that's for very specific customers and very specific business.
Got it. And sitting here today, it's -- there's no guarantee it's hard, but do you feel comfortable that you can return to sort of that 7% to 9% growth in '25?
I won't be able to pinpoint exactly which quarter over the next few quarters, but we will get back to a 7% to 9% construct. And like I said earlier, our position in the marketplace, the areas of growth that we're focused on is biologics some across the entire portfolio, but what's outsized that growth is biologics, GLP-1s and some of the work we're doing with our customers about moving up the HVP curve, so yes, we feel confident we will be back to 7% to 9% construct.
Yes. And if you think -- you've got to remember, within the construct Larry, the 3 drivers in there, 1 is volume the other price and then you've got mix shifts. So you've got 3 drivers supporting that construct over the long term. And if you look back over the CAGR between 2019 and as to where we're guiding today, that's about 10% growth, right, that construct is underpinned by those 3 drivers.
And then if you look at the areas that Eric just called out that support that thesis, particularly around the mix shift, you're looking at the change in regulatory elan GLP or high level of participation around biologics and then demand normalization plus we have the infrastructure and capacity in place now to be able to respond in the required lead times by customers to be able to support that growth over the next number of years.
Our next question comes from the line of Justin Bowers with Deutsche Bank.
So just a couple of questions. How is the coverage ratio shaping up? And how has that changed throughout the year? And then the other question would be just in terms of the destocking. I think earlier in the year, you mentioned that it was skewing heavier towards standard components versus like HVPs. And just curious if that's still what you're seeing?
I'll take the second part, and then I'll hand...
I'll take the coverage.
yes, absolutely. So Justin, thanks for the questions. The coverage ratio is getting stronger. So there's 2 aspects we look at is confirmed orders scheduled out, and we're seeing that increase nicely, not just on a percent ratio perspective, but in absolute dollar for both Q4 of this year and also going into the early part of 2025. And that's 1 aspect. And therefore, as that increases the intra inter-quarter demand profile is actually -- is less of a factor in the growth of the business.
And so we're seeing that come back a little bit slower than we had originally anticipated in the middle part of this year as we were articulating back in February, I believe. And so that's why, hence, why we changed the guidance. But when we look out to Q4 and to 2025, we're seeing very strong indication with confirmed orders and our discussions with our customers are lining up exactly to that conclusion when we look at their destocking programs and when they feel they'll be at a level that they feel is acceptable. So it's lying up nicely. You want to touch on destocking.
Yes. So on the destocking, Justin, when we look at that, we have been seeing that in our Biologics segment and in generics. That's where we saw the biggest impact here in the second quarter. And that's really where as we were going through COVID, that's where we saw the most pressure also around lead times where customers really had to manage their supply chains. And that's where we believe the safety stock built over time. So that's why we are seeing destocking in those areas right now. to a larger extent versus comparing this to our other market units.
And you can see that play through then on the impact on our gross margin and operating margin is that's impacting our mix. We're having want a volume impact because of that, but we're also having a mix impact. And I think what we saw in COVID and what we would see when we return to normalized growth rates seeing that gross margin and operating margin expand in line with our long-term construct and potentially beyond that. So that's -- I think that's where we -- when we look at it, we're looking at it from a revenue perspective, but also looking at an impact on margin and saying how do we get back to the margins that we're used to delivering on. And when we see those biologics and generic markets start to normalize, we'll see the revenue rebound and also from a margin perspective, we'd see that also.
Understood. And then maybe just 1 quick follow-up in terms of your improved throughput. Do you have a sense from your conversation with customers? Are they now trying to manage inventory levels in line with your lead times? Or just trying to get a sense of change in ordering patterns and where that might normalize?
Yes. Justin, exactly that's the point. We're unfortunately, during the pandemic due to the demand that was put on our business. Our lead times did go up to between 30 to 50 weeks. And with the consistency now in the last several quarters of, call it, 8 to 12 weeks, sometimes earlier, sometimes a little bit longer depending on the processing. Our customers are realigning their reordering patterns based on those lead times, and we're seeing that clearly.
So as they built inventories, during the longer lead time periods and during the supply chain constraints during the pandemic and across the whole industry. We're seeing that also coming down, but also the realigning. So what you'll see a pattern of more frequency. I have 1 large bolus that's more paced throughout the next 3 or 4 quarters, which, by the way, is also very effective for our operations. So it aligns really well with where we want to be long term.
Our next question comes from the line of Avantika Dibaria with Bank of America.
This is Mike Ryskin from BofA. Just want to go back and just touch on the destock 1 more time because it's where we're getting the most debate I mean I appreciate all your comments about coverage ratio and conversations with your customers. But -- you also had some more comments after 4Q and 1Q earlier this year. So it just seems like the situation does evolve and the conversations with customers do evolve.
As well as to the guide for in 3Q and 4Q, it seems like there's a little bit of a step-up in poly in 3Q and are pretty sizable step-up in 4Q just to get to the fiscal year numbers. So why not take an even more conservative guide at this point in the cycle? I mean it just seems like there's still some risk that the destock could evolve 1 more time. So I just will love to get your thoughts on that as you progress through the year?
And then tied to that, I'll throw my second question right away. It has to do with the margins and the EPS outlook. Is there any incremental cost cuts that are assumed in 4Q -- 3Q or 4Q to get to the EPS number. Obviously, volume deleverage has a big impact on gross margins, but just wondering what's implied there as you go through the year?
Yes. So what we are seeing is that for Q3, we don't see any major step-up continuing the way we've been going, some sequential improvement, as Eric mentioned in the denistep-up into Q4. And that step up in Q4 is really driven by the customer segments within Biologics and a reasonable improvement in generic, but the main driver is around the biologics market, and that's what we're seeing and that's the information we're getting from our customers. And that informs the basis of our guide at this point. And as Eric said, then there are metrics around that, which have given us confidence that, that will actually materialize.
And then on the EPS, we have been managing our cost base pretty tightly as we're very operationally focused, and we've been managing the variable costs across our plants as we have been going through 2024. One thing that we have to be cognizant of with cost management is that when we're expecting to get back to growth, we need to make sure that we have the right resources and capabilities in place to be able to support that growth. So we don't derail it. So we're managing that pretty tightly.
Other than that, we're not making any significant cost cuts, but we are, I would think, I would say we're using appropriate cost management to manage through the destocking period, although it is extended a little bit longer than we originally anticipated, but also we have to be prepared for returning to growth to make sure that we're able to support our customers with that. Hopefully, that helps.
Our next question comes from the line of Matt Larew with William Blair & Company.
I just want to go back to and what exactly happened in your quarter from a destocking perspective. If I go back to the initial outlook from the Q4 call, where you had incorporated about 2,300 basis points of the cut from the Q3 call last fall from destocking but mentioned that 75% of destocking with some 6 customers.
Obviously, the first quarter results themselves actually were positive relative to the outlook you provided and you maintained the guide for the year. So now having 400 to 500 basis points come out of the organic guide with about 4 months left -- 4, 5 months left in the year is the magnitude is pretty large. So just was it going back to conversations specifically with that group of big customers? Was it something that historically, you've used the worsen did things brought in worsen further?
Was there 1 or 2 pockets of customers or product categories? Just trying to understand what happened from mid-April to the end of June in terms of the big changer.
Yes, Matt, I'll start off and then Eric, if you want to add. What we did see as we were progressing through Q2 and the level of intra-quarter orders that we would have anticipated us to materialize in that period of time. Just it wasn't at the rate that we would have expected it to be. And then there was some timing with customers moving some orders out late in the quarter would have has impacted us.
And then as we've looked at the balance of the year and as we've rolled through the end of June and practically through July, what we're seeing in Q3 is that orders that we would have anticipated as materializing for the period and even some for Q4, they just weren't coming through. And when we assess what was happening there, it's still really related to levels of destocking. So it's gone longer than we would have originally anticipated. And that is essentially the main driver.
And what we -- when we had looked at it originally, our coverage rate for Q3 and Q4 was pretty much in line with or a little bit ahead of pre-COVID levels. But what hasn't happened then is filling in between the actual orders confirmed and the forecast that we had that hasn't accelerated in the way that we would have anticipated that, that would take place. And so when we did the assessments, we felt that we have to be transparent and do the right thing and take the guide down and do it with the right level where we don't want to be in the position where we're cutting and cutting and cutting.
So hence, the reason why the drop in the guide is pretty significant. It's not something we want to do, but it's a reality that we're dealing with today. I think the good thing in the positive for us is that it's actually returning to growth in Q4. So it's really pushed it out a quarter. And again, Q4 isn't as strong as we would have originally anticipated. So we've taken that down as well.
And I'll just add to this. Thanks, Bernard -- became more of a gradual recovery, I believe, in what we're seeing versus more pronounced Q3 recovery. And that's actually 1 of the drivers of why based on the customer conversations, that's still a similar group of customers across multiple segments. Yes, there's some of the larger ones we highlighted earlier in the year that they actually going through the process and then getting to closer to the end of that process.
But as we look through with these discussions, we look at where they are in their process, where we are with our able to produce the products in the very short period of lead times, we are confident moving back to long-term construct. And that will -- it's going to take a little more time than we anticipated. But as I indicated in the guidance that we gave we're getting closer to that in Q4. And we believe that will carry on going forward.
So -- yes, Matt, that is a very clear statement we made earlier this year about being more acute, but it's taking a little bit longer to work out than we anticipated in the industry.
Okay. Understood. And I think having observed this in the bioprocessing industry over the last 18 months, fully appreciate that it's challenging to understand customers' pace of inventory work down and at times, maybe there's competing incentives in terms of them wanting to have capacity available for demand they may or may not give you in the next quarter or 2. So in light of that, you referenced now understanding that customers are managing to you're now more normalized to reduce lead times as part of those conversations, you usually give a better understanding of how much inventory is sitting out there?
And when you kind of combine those 2 observations, does that give you conviction specifically not in the back half of the year, but specifically in the third quarter? And how do you incorporate perhaps the better understanding of where customers are at and to the way you're thinking about this back half guide?
Yes, Matt, the clarity of more recent conversations than the beginning of the year gives us that conviction of where we're going in the near term. And moving up to -- when I talk about the mid- and long term getting back to that, that growth algorithm we've been accustomed to and we expect based on our market position and what we see ahead of us. But yes, we're -- the clarity of where they want to land with the safety stock and the confidence they have in our ability to deliver and meet those service levels that we expect and our customers expect, and we're able to do that today with the capacity we have online. And that's the reason why we feel the capital so that as the growth continues to occur in 2025 and beyond is that we're well positioned versus getting behind the curve, which would happen during the pandemic.
So we have much more visibility today and better clarity, and we're firm on making sure that we are going to be delivering what we said we're going to deliver.
Our next question comes from the line of Jacob Johnson with Stephens.
Maybe just to go back to the EPS guidance. you're pointing to kind of down 1 to 2 organic growth this year. And I think it would seem to apply probably like 300 to 400 bps of operating margin contraction, which is kind of greater decremental margins than the long-term algo would suggest. Can you just that out a bit more? Is some of that capacity additions, et cetera? And then I think I heard Bernard mentioned earlier, perhaps as revenues recover, maybe we could see something better than 100 bps of margin expansion. Can you just talk about the incremental margins as we return to growth in 4Q and beyond?
Yes. So the major impacts on margin that we've seen here in Q2 is really driven by volume and mix. and for high-volume manufacturing operation and a decrease in volume like that is going to have a significant impact. And what where we're seeing it, Jacob, is really in HVP. So they the drop is in biologics and generics. And so we're getting this kind of outsized impact on margin, where if you look back at take the COVID years when we were getting a large amount of expansion in HVP and growth in that area, we were getting outsized margin expansion well beyond or 100 basis points.
So essentially, what we're seeing now is the reverse of that. So when things normalize, we start to see growth again and getting back into our long-term construct. That volume growth will be driven within HVP and then also that aligns with the mix shift as well improving where our HVP was in the kind of mid-70s as a percent of proprietary revenues. And today, what we're saying it's about 71%. And that's the type of impact it has on our business. So when we're returning to growth, we would expect to see that margin recover pretty quickly and in line with that growth, particularly around biologics and the generic space. It's all in gross margin. The OpEx is pretty tight.
Got it. Makes sense. And then maybe just on the bile side of things. You guys referenced the capacity you brought on during COVID and repositioning that now for non-COVID applications. Can you one, talk about the time line for kind of transitioning that capacity to non-COVID demand?
And I guess, two, the other concern, I think a peer of yours reference the other day is that you weren't the only 1 who brought on capacity during COVID and lead times are shorter, and they suggest that customers are going below pre-pandemic inventory levels. And I think investors may be worried this could be structural for some time. Can you just talk about that dynamic as well?
Jacob, I'll take that. So first of all, on repurposing the assets, that's done. So we're able to leverage the notes for like NovaPure softwares, but now so use the processing for our plungers, as an example, or other types of SKUs in the HVP portfolio. So the team has done a great job to get those assets ready to go and they're ready to go. And so as demand comes in, we're ready to respond accordingly.
In regards to what our customers are telling us in regards to where they want to stay with their safety stock, because of where we are in the supply chain and if you think about the economics of our product as a percentage of the drug molecule, we don't see that going down -- further down below pre-pandemic levels. So we believe it's going to -- for us, I can't speak for others. But for us, with our customers, for the types of products we provide, the lead times that we can provide, and it's the number of SKUs we provide to our customers, we believe based on the conversations will be back to pre-pandemic levels.
Our next question comes from the line of Dan Leonard with UBS.
I have another question on visibility. Can you discuss the breadth of your visibility. And I asked because I'm wondering if we're in a situation where you have close contact and visibility with those large customers, but rather it's the long tail of smaller customers that are driving the downside surprise?
Actually, the -- so Dan, thanks for the question, but the more variability has been with the larger customers. And the smaller customers, although obviously, we're very focused on that, that's really in the pipeline when we think about new developments and the volumes there are less and the frequency of orders are probably a bit higher. The predictability of which quarter to lands in is lower, but the order of magnitude on the destocking impact is less. So I'm not sure if that helps, but obviously, a very important part of our portfolio are the smaller biotech pharma companies.
When you think about their innovation pipeline and how that feeds into the whole ecosystem of the injectable medicine space. But the impact that has on our fluctuation on the revenues is not as great. I don't know if that helps, Dan.
That's great. Eric. And a quick follow-up. You mentioned that the new capacity in Dublin opens in the third quarter. How important is Dublin to the fourth quarter revenue ramp?
Not really. I mean the team is going to work really hard to have -- to get that capacity up and running and full utilization with the reality is it takes us a few quarters to ramp any new site of that magnitude up to full capacity. So I would suggest that's not a major driver to why we're calling to give me the guidance the way we are for Q4.
Our next question comes from the line of David Windley with Jefferies.
I'm going to try to ask a few in a different way. Eric, in June when we were together, you talked about 50% or maybe a little less of your revenue comes from large customers where your visibility is higher. I thought you said because of the high volume that you do with them, the connectivity that you have with them and then the smaller customers are much more volatile, and you kind of to Dan's question there, commented on that.
I thought you said that your visibility or your forecasting accuracy around those large customers was really accurate over time, but you also then just said that those are actually the source of the destock. And so I wanted to make sure I understood the historical accuracy and tie in with those large customers, but seemingly a disconnect on that right now. Is that the right way to think about it?
No. What I would say is that -- so David, thanks for the question, but I would say is that the larger customers have larger variability when they do, we'll have a discussion about a forecast. And then they would -- when we get to the point of actually firming up as a firm order, there is some movement that is occurring.
And since it doesn't take many of them to have a meaningful impact compared to the smaller account, it is true on a smaller account, and maybe I should have been clear -- when we look at degree of accuracy, we're looking at quarter versus quarter of prior year. And therefore, in the smaller accounts, that's less predictable on which exactly month quarter it will land. We have a high repeat business model.
And we mentioned this before that majority of our revenues, it's almost annuity like every year, there's a repeat and then what the variable would be drug demand up or down, and then that's the throttle. But in this particular case, when we talk about the degree of accuracy, the smaller accounts from a quarter versus prior quarter is a little more harder to predict. But from an impact to the revenues the larger accounts are the ones that have a more meaningful impact on the dollar value perspective from 1 quarter to the next.
Got it. Okay. And then in terms of the improving confidence I guess I'd like to key on Bernard's answer about kind of the cuts to this year and order patterns earlier in the year, your coverage was encouraging relative to pre-COVID levels, but then the fill in on top of that not coming as you expected. Can you give us some sense of what is the normal level of coverage versus the amount of go get? Like how much go-get do you have for the second half of the year in absolute or relative that gives you the confidence that you can get to the levels that you're now setting?
Yes. What the exact number, we're not going to give out for like pretty obvious reasons, but it's our coverage rate and the go get that we would have to do now on this new guidance is I would say we're more confident around that and delivering it and being able to get it. And it's -- that go get is based on conversations with customers, understanding their order patterns and changing order patterns and factoring all of that in and then understanding what their forecasts are.
So that's what's given us the confidence. So the size of what we have to go get isn't as large from a dollar perspective. And as I said, when we talked about it earlier in the year, we had a level of confidence around it and anticipate a certain conversion rate. Obviously, that hasn't materialized in the way we would have anticipated. So we've had -- so we have adjusted our guidance to reflect that and give us confidence about being able to deliver on the numbers now that we're guiding to.
Got it. And Bernard, to your point, you did -- management did say similar things about when those 6 customers kind of arose and kind of shockingly we're not going to be ordering as much earlier in the year and the guidance was 2% to 3% instead of the 7% to 9% construct. So you had those conversations earlier in the year and are talking about having them again here in the middle of the year. I guess I'd also invoke you mentioned that you go back to pre-COVID levels and look at the growth rate. We've done the same. You said 10%. It looks like it's even a little above 10%.
I guess using that construct, if we were to use the midpoint of the LRP, the 8% of your long-range targets that would imply a revenue level that's still a couple of hundred million dollars below where you're guiding today or said differently that next year would be a flat year to grow into an 8% growth rate from 2019. How do we get confidence that there are factors that bias to the upside, what that growth should be or conversely, that there's not still a couple of hundred million dollars of overbuying in your customers' inventory levels that they still need to work through before you get to that multiyear growth support level?
David, I'll start with this 1 here. One of the biggest drivers in the last 5 years CAGR, taking out Covent was the biologic growth. If you recall back 5 or 6 years ago, our participation rate was high, but the percentage of sales of biologics was sub-20%. And I don't have the exact number for me, but it's about 20% of our overall business, if I recall. . And as the years progressed over those 5 years, the number of approvals, a number of biologics have really accelerated the market and there's a few that we still see continue to outpace the demand that we forecasted with our customers, which is a positive. Now the base of that business is much larger. I believe it's we were around 40%. So we exited as a percentage of the whole company and the company has grown or double in size.
So as we kind of think forward a little bit, the 7% to 9% is why we say the financial construct going forward 7% to 9%, we feel -- we take that in consideration. It's a bigger base we're operating off of continue with leading with HPP in the biologics area will give us that type of growth off of a close to a $3 billion business.
Got it. Okay. I'll leave it at that. I was going to ask 1 more, but I've probably beaten it up enough. .
Our next question comes from the line of Tom DeBourcy with Nephron Research.
Just had a quick question, I guess, CapEx. So the current level of CapEx, 12% to 13% of revenue -- and so I just wanted to get a sense of how you're, I guess, metering the demand or long-term capacity expansion versus maybe short term, weaker demand due to the destocking? And then just as you look to 2025, I think consensus has maybe the number going down to $300 million of CapEx and just not ask you to endorse that number, but just would you expect CapEx to be down year-over-year in 2025.
Well, I'm not going to guide 2025 at this point. But what I would say is that the investments we're making and the higher level of CapEx that we're experiencing right now compared to pre-COVID levels is really targeted at growth in a number of different areas. And for us to layer in that capacity, you're looking at 12, 24, like 36 months in some cases, depending on the lead times of the equipment and the technology that we're installing.
And so when we're doing that, we're looking at what markets are growing. We're looking at the regulatory landscape, what changes are requiring there more finishing capacity we need we're looking at GLP from both the proprietary and a contract manufacturing perspective. And then we're also looking at our participation across Biologics. And again, what sort of capacity we need there.
So we've got 3 pretty powerful drivers for growth coming on over the next couple of years for us, we need to have that capacity installed to meet that demand when it actually materializes so we can respond. So we don't get into the position where our lead times get pushed out like the hedge in the COVID time frame.
Looking beyond, as we said earlier on the call, we would expect our CapEx over the next year or 2 to get back to more normalized levels of 6% to 8% of revenues. That's what we would target we'll be targeting, and that supports the long-term contra growth of 7% to 9% on the top and be more focused again on creating that mix shift and supporting the HVP growth. So hopefully, that kind of gives you some color.
This concludes the question-and-answer session. I would now like to hand the call back over to John Sweeney for closing remarks.
Thank you all for joining us today on the conference call. An online archive of the broadcast will be available on our website at westpharma.com in the Investors section. Additionally, you can access a replay for 30 days following the presentation by using the dial-in numbers and conference ID provided at the end of today's earnings release. That concludes the call. Thank you very much, and have a nice day.
This concludes today's conference call. Thank you for your participation. You may now disconnect.